Tax Season Is a Time to Keep Cool: A Writer’s Guide to Missing 1099-MISC forms and Unpaid Royalties

It’s tax season here in the United States, and a question popping up on many author boards is, “What do I do if my publisher didn’t send me a Form 1099-MISC?”

We US writers love our 1099-MISCs because they list all our book royalties for the year in one place. Every publisher in the US is required by law to send them to writers who earn more than a set amount.

But after several romance publishers closed suddenly last year, some have also failed to provide 1099-MISC forms to their writers. At least two have failed to pay their writers in full for royalties and proceeds earned in 2016.

This has led to a lot of confusion.

I am not a tax expert, but as a self-employed writer, I have dealt with 1099-MISCs, missing 1099-MISCs, and miscellaneous losses every tax season for the past two decades. This year, I’ve found myself repeating the same information about taxes on a lot of different author boards, so I thought I’d throw it all here in one post for quick reference.

I hope you find it helpful. Just keep in mind that this article is not financial or tax advice, so don’t sue me if you don’t like it.

Who needs a 1099-MISC?

People who earn salaries or hourly wages get W-2 forms so they can report their earnings to the IRS. Independent writers get 1099-MISCs.

US publishers are required to send a 1099-MISC to any writer who receives more than $10 in royalties over the course of a calendar year. If they don’t pay a writer royalties in a given year, but rather another type of payment such as a flat fee or per diem, a 1099-MISC is only required once payouts hit more than $600 in a year. (Flat fees are common for multi-author anthologies and ghostwritten novels.)

Here’s a little explanation of the difference between royalties and other compensation: Federal 1099 Filing Requirements (Payable.com)

The writer then uses these forms to report the income on Schedule C of Form 1040.

• Form 1040 is the individual income tax return that most people earning money in the United States file each year
• Schedule C is for reporting self-employment or sole proprietorship income. This is the way most writers dos.

Publishers must also send a copy of each 1099-MISC to the Internal Revenue Service. This helps the IRS get a clearer picture of the publishers’ earnings.

A 1099-MISC should only include money actually paid to you. Royalties that are owed but not paid should not appear on your 1099-MISC. If a publisher did this, you should have contacted them about correcting the form (instructions here). If they refused or didn’t answer, I would be concerned about tax fraud. You’ll find more about that the final section of this article, Contact the IRS.

What if you don’t get a 1099-MISC?

You have four healthy options when you’re missing a 1099-MISC, and I’ll cover them in this section:

• Don’t panic. You’re not in trouble with the IRS.
• Report any income earned, whether or not you have a 1099-MISC to back it up.
• It’s usually a bad idea to deduct unpaid taxes as a loss.
• Report suspected fraud to the IRS.

Don’t fret

While your publisher is bound by law to send you a 1099-MISC under certain circumstances, you’re not legally bound to receive it.

Don’t try to contact the publisher for a missing 1099-MISC. You will NOT get in trouble for failing to receive a 1099-MISC. If the publisher sent you one and it simply got lost in the mail, requesting a second 1099-MISC can cause more trouble that it’s worth.

Report the income anyway

While you won’t get in trouble for not having a 1099-MISC, you can get in trouble for not reporting income paid to you in 2016. If your publisher should have sent you a 1099-MISC for $223 in royalties, you need to tell the Internal Revenue Service about that $223. Add that $223 to any of the other income you received from your business in 2016 and enter the total on Line 1, Part 1 of Schedule C, “Gross Receipts and Sales.” (Click here to view a PDF of Schedule C on the IRS website.)

What if my publisher underpaid me last year?

In one of the authors’ groups I was involved in following the collapse of a small press, members advised one another to:

• calculate the amount of money the publisher owed them
• then deduct that amount from their taxes.

This is bad advice. 

Do not deduct unpaid royalties from your taxes without consulting a tax professional first. Such deductions are almost always based on a misunderstanding of the tax code and, for most writers, are illegal.

To understand why, you need to think about how you generally track your earnings for the IRS. There are two ways to do this: cash basis and accrual basis.

Cash basis

Cash basis means that you report income based on when you received it. Say you spent two years writing a novel and then submitted it to publishers in late 2013. You signed a publishing contract in 2014 but didn’t receive an advance against royalties. The book finally hit bookstores in October 2015.  Retailers sent sales reports to your publisher on Dec 31, 2015, or maybe in early January 2016.

And finally, at the end of April 2016, you get your first royalty check.

You started working on the book in 2010, but technically it didn’t start earning money until 2015. And you received no income from it until 2016.

Writers have enough cash-flow issues as it is. The last thing we want to do is pay taxes before we’ve seen a dime of royalties.

So most of us in this scenario would wait to report royalty income once we’ve received the money from our publishers (or our book distributors, in the case of self-publishers). This is easier for most of us, and it’s also legal. It’s what the IRS means when they ask on Line F of Schedule C if you used the “Cash” method of accounting.

Accrual basis

Accrual basis means that you report income based on when you earned it. In the scenario above, you would report on royalties as each book sold. That would mean requesting copies of all the royalties and earnings reports as soon as they were available, calculating any earnings that accumulated in 2015, and paying taxes on them by April 15, 2016—the deadline for the 2015 tax year.

All this before you see a red cent.

Because of the cash flow issue and all the extra accounting required by accrual basis reporting, few writers opt for it.

Claiming losses

The IRS allows business owners to deduct losses only when they involve actual money. It doesn’t care about your squandered time or energy; it cares about your Benjamins. An unpaid royalty might qualify as a loss if:

1. You already reported it as earned income and paid taxes on it — that is, you do accrual basis accounting.
2. …
3. …

(I was really eager to list multiple scenarios in which an author can deduct unpaid royalties. But I could think of only one. Sorry, folks.)

And that’s why most writers can’t deduct money owed to them from their taxes.

You can read more about Why Most Self-Employed Service Providers Can’t Deduct Bad Business Debts on Nolo.com

Contacting the IRS

I’m sorry the last section was such bad news. But if you’re into retaliation, here’s the good news: If you didn’t get a 1099-MISC or got an inaccurate 1099-MISC, you might be able to report your former publisher for suspected fraud.

As I mentioned earlier, publishers and distributors are legally obligated to send 1099-MISCs under certain circumstances. If they don’t, it could be evidence of a few things:

• a mail mix-up
• the same poor management that led to the company’s collapse
• intent to deceive the IRS, i.e., fraud

Why fraud? 1099-MISCs are one method the IRS uses to track a company’s transactions and guess at its earnings. Failing to provide 1099s might be evidence that a company is trying to subvert this process. It may be planning to underreport its earnings to the US government.

Additionally, inaccurate 1099-MISCs can be a sign of fraud or, at the very least, poorly kept financial records.

Tell the IRS about an inaccurate 1099-MISC, even if the publisher sent you a corrected one. See Disagree With An IRS Form 1099? Here’s What To Do on Forbes.com for instructions.

If you suspect a publisher or distributor of tax fraud, you can:

• Report online.
• Call the US Tax Fraud Hotline at 1-800-829-0433 to order Form 3949-A.
• Send a letter to Internal Revenue Service, Fresno, CA 93888. It should include:
  • The publisher’s name and address
  • the publisher’s employer identification number (you can get this from a previous year’s 1099-MISC or by asking other authors who worked with the publisher)
  • a brief description of the violation
  • the years involved
  • the estimated income involved in the deception
  • any documentation you may have available to support the allegation
  • whether you consider the suspect dangerous

Finally, be judicious with your power. If you think your screwy 1099-MISC was the result of an honest mistake, don’t report fraud just for revenge. This isn’t The Game of Thrones, and you’re not Cersei Lannister.

Questions, anyone?

Taxes are confusing. I’d love to hear any questions or comments you have below. If I don’t know the answer, I’ll probably obsess over it until I figure it out. Or maybe another reader can point you in the right direction.

Thanks for stopping by!

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